Compared to Registered Retirement Savings Plans (RRSPs) or even the relatively new Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs) are a low priority for the mainstream financial institutions. The reason is quite simple: relatively speaking RESPs are small fry for the big financial institutions. While Canadians hold more than $600 billion in their RRSP accounts (2005 figures from The Wealth of Canadians report by Statistics Canada), the total value of RESP accounts is just $26 billion (2009 figures from the Canada Education Savings Program – Annual Statistical Review 2009). This mismatch is also reflected in books: a number of RRSP books are published every year but to my knowledge, there are no books covering RESPs.

Mike Holman who writes the Money Smarts Blog has filled this gap by penning a valuable resource on RESPs. The author starts off by explaining the unique and sometimes complicated rules governing RESPs. He then talks about the main reason RESPs are the best way to save for a child’s education for most people: the various grants available from the Federal Government and additional grants that Alberta and Quebec residents may be eligible for from their provincial governments. The final chapters deal with how to open a RESP account and how to invest the contributions and grants.

To be honest, most of the information available in the book can be found scattered between Government websites, newspaper articles, blog posts and forum discussions. But frazzled new parents will likely appreciate that the author has put everything together in one slim volume. And hopefully most readers will take the author’s advice and open a self-directed or bank RESP. Or at least opt for a Group RESP after carefully considering other options available to them.

The RESP Book: The Complete Guide to Registered Retirement Savings Plans for Canadians is available from Amazon.ca for $15.99. It should be noted here that a review copy was provided by the author. I should also mention that I’ve personally known Mike for many years and consider him a friend. You can find links to more reviews of The RESP Book on the Money Smarts Blog. The Globe and Mail recently published an excerpt from the book.

Related Reading:

• Basics of Registered Education Savings Plans (RESP)
• Interesting Report on RESPs
• Lack of flexibility a big problem with Scholarship RESP Plans
• TFSA versus RESP
• Book Review: The Lazy Investor

Book Review: The RESP Book is brought to you by Canadian Capitalist — Helping you to invest & prosper.

Last week I wrote about whether US-listed ETFs are really cheaper once you account for currency exchange fees, and then I looked at ways to reduce forex fees. The spreadsheet I created to compare US and Canadian ETFs allows investors to compare the costs using several assumptions.

One of those assumptions was to ignore currency hedging. Unfortunately, the reality is that the decision about whether or not to use hedging is likely to be the single most important factor affecting the return of your foreign investments. If the Canadian dollar moves up or down 15% over the period you’re invested, that will clearly have far more impact than a lower MER or a currency exchange fee. Too bad all we can do when it comes to currency fluctuations is guess.

Most Canadian ETFs with foreign holdings — notably XSP, XIN, CLU and CWO — use currency hedging. Not all of them do, however: unhedged international ETFs include the Claymore International Fundamental (CIE) and the iShares MSCI Emerging Markets Index Fund (XEM). Claymore also has an unhedged version of its US Fundamental Index ETF (CLU.C), though the trading volume is very low, attesting to just how unpopular the US dollar is with Canadian investors.

If you have a strong desire to eliminate currency risk from your portfolio, you’d be wise to use an ETF with hedging, regardless of the higher fees. (Note that the frictional cost of hedging is about 0.15% annually, according to iShares. This cost is not included in the MER.)

For example, if you’re in your sixties and you plan to spend all of your retirement in Canada, you may well be wise to pay extra to hedge your foreign investments. Just keep in mind you could lose the bet: if the loonie fares poorly over the next decade, you would have done better with foreign currency exposure. However, you will have the assurance that a plunging US dollar won’t jeopardize your retirement, and there is some value in that.

If you’re investing for decades, however, I believe it makes little sense to place a bet on which way the dollar will go. It’s fashionable these days to say the US dollar is doomed, but investors have incredibly short memories. The loonie was worth $0.77 US as recently as early 2009, and it averaged about $0.63 US in 2002. Anyone who thinks the Canadian dollar can’t ever return to these levels is a foolish optimist. You may as well try to forecast what the winter in Calgary will be like in 2020.

It’s more reasonable to expect random currency fluctuations over several decades. As you approach retirement, it may make sense to move some foreign holdings into funds that use hedging when the exchange rate appears to be in your favour. But if you’re a long way from having to tap your nest egg for income, your best bet is to keep costs as low as possible and have exposure to foreign currency for its diversification benefit.

Writing in the Financial Times, the New York University economist known as “Dr. Doom” explains that the expiration of existing stimulus and transfer payments will stall the economy precisely when it needs a boost. Further, a strong Republican showing in the midterms will embolden the opposition and weaken Obama, possibly resulting in Congressional gridlock.

Labeling the Republicans’ economic platform the “economic equivalent of creationism,” Roubini says a lack of bi-partisanism on fiscal issues could lead to a debt crisis and possibly send the U.S. into a Japanese-style bout of stagflation.
]]> http://www.moneysense.ca/2010/10/29/u-s-economy-headed-for-a-cliff-roubini/feed/ 30 http://www.moneysense.ca/2010/10/29/after-the-break-up/ http://www.moneysense.ca/2010/10/29/after-the-break-up/#comments Fri, 29 Oct 2010 14:34:38 +0000 Julie Cazzin http://www.moneysense.ca/?p=8269 Sam Evans first met Martha Lee when she auditioned as a singer in his band. Sam found her voice thrilling and was instantly smitten. It wasn’t long before Martha moved into his Toronto townhouse, and for several years, they lived together as a happy couple.

Sam, 33, had bought the townhouse with a $100,000 inheritance, and he paid the mortgage (names have been changed for privacy reasons). Martha, 31, shared the cost of maintaining and renovating their home.

But as time went on, Sam noticed Martha was having trouble paying the bills. She shopped all the time and hid purchases from him. At first he helped her out when he could, but she kept spending more and more. “I’m very fastidious about money,” says Sam. “So when she refused to see a counsellor about her spending, I told her the relationship was over.”

Their common-law relationship ended after seven years, but their disputes about money did not. Sam said the townhouse belonged to him alone; Martha said because she had helped pay for new windows, a furnace and the roof, she was entitled to half the house. Was she right? She took Sam to court to find out.

There are a lot of misconceptions when it comes to property rights for couples who choose not to marry, but who legally become common-law spouses after living together for one to three years (depending on your province). Some think they have no legal obligations at all, others think they have the same rights as married couples. The reality is somewhere in between.

Unlike in a marriage, with a common-law relationship the property that you bring into the relationship typically continues to belong to you alone. So if you and your spouse separate, you do not automatically divide everything in half.

But if you have made contributions to maintaining or improving your spouse’s property, you can try to get that money back by going to court. “You can only settle property issues with a trial,” says Jacqueline Peet­ers, a lawyer with Bir­enbaum, Steinberg, Landau, Savin & Colraine in Toronto. “It is evidence-based and the common-law spouse making the claim will have to bring receipts for any work she claims she paid for.”

One way to avoid going to court in the first place is to draw up a cohabitation agreement that describes how property will be divided in the event of a split. “Such agreements are worthwhile when there’s a lot of imbalance in the net worth of the two spouses,” says Peeters. Of course, you’ll want to feel your partner out about this carefully—not everyone is keen on the idea.

A year after the breakup, Martha is still waiting for her day in court. Judging by past cases, she’ll likely get some compensation, but not much. Her legal fees will probably outweigh her payout, putting her even further in debt. It’s a sad ending to a romance that started out so well.
]]> http://www.moneysense.ca/2010/10/29/after-the-break-up/feed/ 74 http://www.moneysense.ca/2010/10/28/this-and-that-premium-hikes-battered-investors-and-more%e2%80%a6/ http://www.moneysense.ca/2010/10/28/this-and-that-premium-hikes-battered-investors-and-more%e2%80%a6/#comments Fri, 29 Oct 2010 01:13:15 +0000 Ram Balakrishnan http://www.canadiancapitalist.com/?p=4324 This and That: Premium hikes, battered investors and more… is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

In light of the market crash of Fall 2008, does diversification still make sense? In this video excerpt, Harry Markowitz explains the even in the market crash, different asset classes did behave as one would have expected them to:

• Citing a low interest-rate environment, Manulife Financial has announced that it will be hiking premiums on universal life policies. James Daw writes in The Star that consumers who foresee a need for permanent insurance may benefit from shopping sooner than later.
• Battered Investor Syndrome. That’s the colourful term value investor David Dremen employs to describe the mindset of investors who have experienced a couple of bruising bear markets in the past 10 years.
• Pay a salary or a dividend? It’s the eternal dilemma of a small business owner. Tax expert Jamie Golombek has a clear-cut answer: small business owners may actually be better off if they paid themselves enough dividends each year to fund current consumption and retained any surplus funds inside the corporation, where they would be invested in a diversified portfolio.
• Here’s a questionnaire from KPMG to help you decide if you need to update your estate plan.
• Million Dollar Journey has some wealth building tips for new graduates. The most important, in my opinion, is to simply learn to spend less than we earn.
• Money Smarts Blog did an exhaustive comparison of discount brokers. I like TD Waterhouse the most among the brokers I’ve used.
• Larry MacDonald says that there may not be much of a price difference between Canada and the US for cars like the Porsche Cayman due to currency rebates.
• Canadians investing in US-listed ETFs take a substantial initial hit on the currency exchange. Canadian Couch Potato offers some methods for reducing the cost of currency conversions.
• With investors suffering from the afore-mentioned Battered Investor Syndrome, you don’t hear much about the Smith Manoeuvre (SM) these days. In his Globe column Preet Banerjee says that leverage investing strategies such as the SM require a strong stomach for losses that a lot of investors lack.
• The Financial Blogger took a look at the pros and cons of using a credit card for all your payments.
• We hear a lot about modest returns from investments. Michael James points out that in a low inflation environment, these returns are not all that modest after all.
• For two long months, Canadian Financial Stuff had been running around trying to withdraw money from a RESP. He shares the lessons learned during the process here.
• Though he mostly invests for dividends, My Own Advisor says ETFs offer an effortless way to invest.
• Canadian Finance Blog shares some tips on how to watch cheap or free TV. These offerings are not strong enough to cut cable just yet (at least here in Ottawa).
• Young & Thrifty listed the pros and cons of growing up wealthy.

I’m unable to highlight all the articles worth checking out in my weekly round up but you can check them out through my Twitter feed. I try and keep my tweets to an average of not more than 5 per weekday.

Happy Halloween everyone! Have a great weekend!

Related Reading:

• How to avoid currency conversions on US Dividends
• Reader Question on How to Reinvest Dividends
• Reader Question on US Dollar Dividends in a RRSP
• Security In An Insecure World: A Benjamin Graham Lecture
• Top 5 Investment Deals

This and That: Premium hikes, battered investors and more… is brought to you by Canadian Capitalist — Helping you to invest & prosper.

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Jeff Pierce, 35
Full-time trader and blogger at Zentrader.ca; Vancouver

When I first started trading around 11 years ago, I would look at price-earnings ratios and all the statistics. Positive earnings reports would come out and the stock would drop, or the reports would be bad and the stock would go up. And it just got me thinking ‘this is all garbage’—trying to analyze and determine what a stock is worth. You just have to follow the crowd. It took me two or three years to develop a strategy and I’ve been doing momentum swing trading since then.

I developed a system with my own indicators. I look at the markets, then the sectors, then the individual stocks. My two favourite indicators are the Relative Strength Index, or RSI, a technical measure that attempts to gauge if a stock is overvalued or undervalued, and the Average Directional Index, or ADX, which attempts to measure the strength of that trend. My system tells me when to be long, when to be short, and when to be in cash.

The best thing about using a system like this is that it helps you to overcome your bias about where the market is going. If you’re extremely bearish and think the market is going to fall, something in your brain will seek out information which confirms that belief. That’s why I don’t watch the news. I don’t read or watch anything to influence my opinion on what’s going to happen in the market. So far, everything is working out fine.

Investors who nimbly hop on a good trend often prosper. Sure the ride can be wild at times, but simply buying a portfolio of stocks that have seen big gains over the last year has been a winning strategy. It turns out that stocks that are going up tend to keep going up for a while, so jumping on a series of fast-rising stars and selling them off before they fall can lead to impressive returns over time.

…..

What is momentum investing? At its simplest, momentum investing means picking stocks based on how well they have fared over the past year compared to the average. The stocks that have risen the most are good positive momentum candidates. If that sounds suspiciously like technical analysis to you, you’re right. It is. Yet this approach has been working well for a very long time.

Famed investor James O’Shaughnessy examined the return pattern of portfolios containing the 50 best (and worst) performing large U.S. stocks each year in his book What Works on Wall Street. From 1951 to 2003, he found that the positive momentum group gained an average of 14.73% annually versus the market, which returned 11.71% per year. Stocks with negative momentum trailed with average gains of only 9.11% a year over the same period.

What time period should you use? You may be wondering if using a one-year time frame is special. Maybe buying based on a stock’s performance over the past six months or two years would be better? Indeed, these questions have inspired a host of research. The result? Some time periods do seem to be better than others for some investors.

One strategy is to buy a new momentum portfolio each month, hold it for a month, and then replace it. (It’s not quite day trading but it’s getting there.) And rather than measuring each stock’s momentum over the past year, you only look at the period ranging from 12 months to two months prior to the stock’s purchase date. In short, you ignore the performance during the past two months.

How do momentum stocks perform? Looking over the whole period from 1980 to 2010, the positive momentum portfolio has been a big winner. It provided average returns of 15.5% a year over 30 years. At the same time, the S&P 500 advanced 11.2%, meaning that the momentum strategy delivered a whopping 4.3 percentage point boost, on average, each year.

You should keep in mind, however, that these annual returns do not include fees, such as trading commissions, nor pricey frictions, such as bid-ask spreads. Given the frequent trading involved, those costs can really add up—in some cases to the point where this strategy could be unprofitable in practice. That’s why many traders are keen to opt for longer holding periods. For small investors, who face substantial trading frictions and commissions, rebalancing once a year is more practical due to the lower costs involved.

With this in mind, we’ve put together a list of 10 stocks that exhibit strong positive momentum. We’re opting for the less frantic O’Shaughnessy approach which means that you can hold the selected stocks for one year based on returns over the past year. Because his results are based on large stocks, we’ll stick to firms in the S&P 500. Our picks are shown in Top momentum stocks below.

What can go wrong? Momentum portfolios tend to be highly volatile and a small 10-stock portfolio will likely accentuate the already large swings.

If you’re keen on pursuing such a high volatility strategy, you’ll need an iron stomach and you might want to do it with only a small portion of your portfolio. One also needs a rather extraordinary level of faith that such a simple approach will continue to work, and you’ll be sorely tested in downturns. It can be very easy to give up on momentum at exactly the wrong time. Make no mistake, momentum isn’t for everyone.

Top momentum stocks

These 10 stocks had the largest price gain of all the stocks in the S&P 500 over the past year. Such stocks tend to keep surging for a while, so betting on the latest rising stars can pay off over time.

Many thanks to everyone who entered the draw to win one of three copies of the MoneySense Guide to Retiring Wealthy. Congratulations to the winners: Dejan G., Kris S., and Dan L.

The guide is available at retailers such as Chapters, Indigo, Shopper’s Drug Mart, Walmart and Loblaws, or online for $9.95 plus $3 shipping.

A Franklin Templeton Investments survey of Canadian men and women found that women are less likely to hold investments and have less confidence in meeting their financial goals than men.

Only 65% of women surveyed were satisfied with their investment knowledge compared to 77% of men. Women also have lower expectations regarding returns, with 26% defining themselves as pessimistic about their investments versus 18% of men.

According to Franklin Templeton, choosing the right advisor helps. The poll reveals that women investors who work with an advisor are 14% more satisfied with their knowledge, 15% more optimistic and 16% more confident in their financial plans compared to women without advisors.
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